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3 Electronics Stocks to Watch From a Challenging Industry
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The Zacks Electronics – Miscellaneous Products industry is benefiting from the rise in semiconductor capital expenditure despite the negative impact of the pandemic-induced supply-chain constraints. High demand for semiconductor chips is expected to keep the supply chain under pressure, thereby driving average selling price. Increasing spending on advanced technologies bodes well for industry participants like KLA Corp (KLAC - Free Report) , Garmin (GRMN - Free Report) and Flex (FLEX - Free Report) . Continuing investments in data-center, high-performance computing (HPC) and 5G end-markets are key catalysts. Fab (foundry) expansion in the United States, South Korea, Taiwan and China as well as higher spending on memory equipment is expected to drive growth in 2022 and beyond.
Industry Description
The Zacks Electronics – Miscellaneous Products industry includes a number of original equipment manufacturers (OEMs) of air-conditioning systems, remote control systems, GPS navigation, home automation systems, healthcare devices, industry/factory automation, robotics, semiconductor applications and energy management solutions. The industry is evolving on digital transformation and growing demand for silicon across multiple markets. Increasing cost of manufacturing bodes well for equipment suppliers while growing demand for silicon is a positive for semiconductor companies. Apart from the United States, companies in this industry are domiciled in Japan, Germany, the Netherlands and Switzerland. These companies either have manufacturing operations in China and South-East Asia or generate significant revenues from the regions.
3 Trends Shaping the Future of the Industry
Solid Capital Spending Drives Prospects: Increasing capital expenditure by semiconductor companies is expected to improve further in 2022 and beyond driven by investments in infrastructure as well as expanded capacity. Since semiconductor companies are major customers of the miscellaneous electronics product manufacturers, this trend bodes well for industry participants. In addition, rising spending on advanced nodes — 7 nm, 5 nm and 3 nm processes from logic and foundry customers — bodes well for industry participants. In fact, logic and foundry spending is anticipated to remain healthy this year. Although data-center, HPC and 5G-related infrastructure demand looks encouraging, downbeat business sentiments due to COVID-19 can affect spending in the near term.
Coronavirus Pandemic Remains a Headwind: Industry participants are bearing the brunt of the coronavirus-induced challenging macro-economic environment. The pandemic-related uncertainties have disrupted end-market demand (automotive, IoT). Moreover, supply chain headwinds is a major challenge for industry participants in the near term.
Volatility in Commodity Prices is a Concern: OEMs are exposed to volatility in the prices of commodities like copper and steel. The coronavirus pandemic is negatively impacting commodity markets due to a sharp slowdown in global manufacturing activity despite the unprecedented stimulus measures taken to buoy demand. Apart from this, industry participants are expected to face headwinds due to the U.S. ban on Huawei and HiSilicon.
Zacks Industry Rank
The Zacks Electronics – Miscellaneous Products industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #211, which places it in the bottom 17% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates continued underperformance in the days to come.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Jan 31, 2021, the industry’s earnings estimate for the current year has moved down 12.3%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Electronics – Miscellaneous Products industry has underperformed the S&P 500 Index and its sector in the past year.
The industry has declined 6.4% during this period against the S&P 500 composite’s appreciation of 18.2% and the broader sector’s rally of 7.3%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month P/E, which is a commonly used multiple for valuing electronics-miscellaneous products companies, we see that the industry is currently trading at 18.51X compared with the S&P 500’s 20.36X and the sector’s forward-12-month P/E of 25.81X.
Over the last five years, the industry has traded as high as 21.44X, as low as 10.23X and at the median of 15.59X, as the chart below shows.
Growing Foundry and Logic investments are a major positive for KLA. Additionally, enhanced wafer cleanliness and geometry specifications in the bare wafer market are driving demand for the company’s wafer products. Furthermore, high exposure to 5G mobile & infrastructure and growing demand in automotive remain tailwinds. Further, solid momentum in wafer fabrication equipment remains a positive factor. Markedly, the transition to advanced nodes and the insertion of EUV lithography are expected to drive growth in the near future.
KLA’s shares have returned 29.9% in the past year. The Zacks Consensus Estimate for KLAC’s 2022 earnings has moved down 2.3% to $20.71 per share over the past 60 days.
Price and Consensus: KLAC
Garmin – This Zacks Rank #3 company is gaining solid momentum in fitness and marine segments, which is driving its top line. Additionally, advanced wearables, chartplotters, Panoptix sonars and cycling products are gaining traction in the market.
Strengthening momentum across specialty categories and new OEM programs is a positive for Garmin. Further, the growing footprint in auto and aviation segments is contributing well.
Garmin’s shares have gained 5.4% in the past year. The Zacks Consensus Estimate for GRMN’s current-year earnings has moved up by a penny to $6.27 per share in 60 days’ time.
Price and Consensus: GRMN
Flex – The Singapore-based company benefits from strength across the Agility Solutions and Reliability Solutions segments along with a solid end-market focus on the back of emerging opportunities.
Flex’s diversified portfolio with increased focus on end-markets like 5G, converged enterprise and cloud bodes well. The company is also likely to gain from robust momentum seen in Artificial Intelligence (AI), augmented & virtual reality (AR/VR), Industrial automation, autonomous/connected cars and other upcoming technologies.
Flex shares have been down 11.6% in the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s fiscal-year 2022 earnings has been revised 5% upward to $1.88 over the past 60 days.
Price and Consensus: FLEX
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3 Electronics Stocks to Watch From a Challenging Industry
The Zacks Electronics – Miscellaneous Products industry is benefiting from the rise in semiconductor capital expenditure despite the negative impact of the pandemic-induced supply-chain constraints. High demand for semiconductor chips is expected to keep the supply chain under pressure, thereby driving average selling price. Increasing spending on advanced technologies bodes well for industry participants like KLA Corp (KLAC - Free Report) , Garmin (GRMN - Free Report) and Flex (FLEX - Free Report) . Continuing investments in data-center, high-performance computing (HPC) and 5G end-markets are key catalysts. Fab (foundry) expansion in the United States, South Korea, Taiwan and China as well as higher spending on memory equipment is expected to drive growth in 2022 and beyond.
Industry Description
The Zacks Electronics – Miscellaneous Products industry includes a number of original equipment manufacturers (OEMs) of air-conditioning systems, remote control systems, GPS navigation, home automation systems, healthcare devices, industry/factory automation, robotics, semiconductor applications and energy management solutions. The industry is evolving on digital transformation and growing demand for silicon across multiple markets. Increasing cost of manufacturing bodes well for equipment suppliers while growing demand for silicon is a positive for semiconductor companies. Apart from the United States, companies in this industry are domiciled in Japan, Germany, the Netherlands and Switzerland. These companies either have manufacturing operations in China and South-East Asia or generate significant revenues from the regions.
3 Trends Shaping the Future of the Industry
Solid Capital Spending Drives Prospects: Increasing capital expenditure by semiconductor companies is expected to improve further in 2022 and beyond driven by investments in infrastructure as well as expanded capacity. Since semiconductor companies are major customers of the miscellaneous electronics product manufacturers, this trend bodes well for industry participants. In addition, rising spending on advanced nodes — 7 nm, 5 nm and 3 nm processes from logic and foundry customers — bodes well for industry participants. In fact, logic and foundry spending is anticipated to remain healthy this year. Although data-center, HPC and 5G-related infrastructure demand looks encouraging, downbeat business sentiments due to COVID-19 can affect spending in the near term.
Coronavirus Pandemic Remains a Headwind: Industry participants are bearing the brunt of the coronavirus-induced challenging macro-economic environment. The pandemic-related uncertainties have disrupted end-market demand (automotive, IoT). Moreover, supply chain headwinds is a major challenge for industry participants in the near term.
Volatility in Commodity Prices is a Concern: OEMs are exposed to volatility in the prices of commodities like copper and steel. The coronavirus pandemic is negatively impacting commodity markets due to a sharp slowdown in global manufacturing activity despite the unprecedented stimulus measures taken to buoy demand. Apart from this, industry participants are expected to face headwinds due to the U.S. ban on Huawei and HiSilicon.
Zacks Industry Rank
The Zacks Electronics – Miscellaneous Products industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #211, which places it in the bottom 17% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates continued underperformance in the days to come.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Jan 31, 2021, the industry’s earnings estimate for the current year has moved down 12.3%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Electronics – Miscellaneous Products industry has underperformed the S&P 500 Index and its sector in the past year.
The industry has declined 6.4% during this period against the S&P 500 composite’s appreciation of 18.2% and the broader sector’s rally of 7.3%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month P/E, which is a commonly used multiple for valuing electronics-miscellaneous products companies, we see that the industry is currently trading at 18.51X compared with the S&P 500’s 20.36X and the sector’s forward-12-month P/E of 25.81X.
Over the last five years, the industry has traded as high as 21.44X, as low as 10.23X and at the median of 15.59X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Stocks to Watch
KLA Corp – This Zacks Rank #3 (Hold) company benefits from increased customer demand across each major product group -- defect inspection and metrology. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Growing Foundry and Logic investments are a major positive for KLA. Additionally, enhanced wafer cleanliness and geometry specifications in the bare wafer market are driving demand for the company’s wafer products. Furthermore, high exposure to 5G mobile & infrastructure and growing demand in automotive remain tailwinds. Further, solid momentum in wafer fabrication equipment remains a positive factor. Markedly, the transition to advanced nodes and the insertion of EUV lithography are expected to drive growth in the near future.
KLA’s shares have returned 29.9% in the past year. The Zacks Consensus Estimate for KLAC’s 2022 earnings has moved down 2.3% to $20.71 per share over the past 60 days.
Price and Consensus: KLAC
Garmin – This Zacks Rank #3 company is gaining solid momentum in fitness and marine segments, which is driving its top line. Additionally, advanced wearables, chartplotters, Panoptix sonars and cycling products are gaining traction in the market.
Strengthening momentum across specialty categories and new OEM programs is a positive for Garmin. Further, the growing footprint in auto and aviation segments is contributing well.
Garmin’s shares have gained 5.4% in the past year. The Zacks Consensus Estimate for GRMN’s current-year earnings has moved up by a penny to $6.27 per share in 60 days’ time.
Price and Consensus: GRMN
Flex – The Singapore-based company benefits from strength across the Agility Solutions and Reliability Solutions segments along with a solid end-market focus on the back of emerging opportunities.
Flex’s diversified portfolio with increased focus on end-markets like 5G, converged enterprise and cloud bodes well. The company is also likely to gain from robust momentum seen in Artificial Intelligence (AI), augmented & virtual reality (AR/VR), Industrial automation, autonomous/connected cars and other upcoming technologies.
Flex shares have been down 11.6% in the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s fiscal-year 2022 earnings has been revised 5% upward to $1.88 over the past 60 days.
Price and Consensus: FLEX
